Phil Power: Cities' survival tied to fixing legacy costs

Thursday

Nov 14, 2013 at 11:30 AM

I think it was around six years ago when I first heard faint rumblings about a coming financial tidal wave that was going to break over our cities, townships and villages, bringing with it the risk of a new civil war between retirees and taxpayers. The phrases were dire — "Enormous unfunded liabilities." "Retiree pensions threatened." "Retiree health care in doubt."

Still, Armageddon looked a long way off. Then came the Great Recession. Soon, with the revelations about Detroit's disastrous financial condition, the rumblings roosted onto one city. Decades of mismanagement had led to close to $20 billion in unfunded pension and health care obligations.

Before long, all this had spawned the Motor City's petitioning to be allowed to go through what looks certain to be the biggest municipal bankruptcy in American history.

Today, there are those who likely still feel as if Detroit were the only place in Michigan where unfunded retiree debt represented a problem. But sadly, that's not so … not by a long shot.

The result is sobering. Scorsone, a former chief economist for the state senate fiscal agency, found that total municipal debt in Michigan in places outside Detroit adds up to $13.5 billion.

How much of that is fully funded? Only six percent!

That leaves a mind-numbing total of $12.7 billion unfunded municipal legacy debt, nearly 80 percent of which is tied to health care.

That's substantially more than Detroit's total unfunded debt. And it represents nothing less than a crisis in (temporarily) slow motion for many Michigan communities: For Ann Arbor, unfunded debt equals 30 percent of total annual general revenue. For Grand Rapids, it's 25 percent. In Saginaw, it's an eye-popping 85 percent.

What does this all mean? Simple: Cities all across Michigan could face a jagged no-win choice between sharply reducing benefits earned by retired municipal employees after a lifetime of labor — or stick current residents and businesses with the bill. The choices appear terrible. If municipal employers do try to reduce long-promised benefits, retirees who counted on that money will be furious … to put it mildly. On the other hand, cities that slash services and increase taxes to pay down all this debt may wind up driving away the residents and businesses that make their communities thrive.

Here's how this ghastly choice plays out. The owner of a $200,000 home in Ann Arbor would have to pay $491 added taxes a year to adequately fund the city's annual pension, retiree health care and other legacy debts. In Grand Rapids, it would take $1,731. And in Saginaw, where the median household income is around $28,000, the homeowner would pay $4,693 per year.

These are impossible figures. Today, if you are a mayor or city council member in one of these cities, and you are not lying awake fretting about what to do about unfunded legacy costs, you're close to being guilty of dereliction of duty. Those elected before you, who created this system and did nothing, are guilty, beyond doubt. When Monday night council meetings roll around in hundreds of communities all across Michigan, legacy costs should be the number one item on the agenda. If they aren't, it is easy to make the case that your elected officials are just fiddling while their towns burn.

You don't have to be a CPA to see that local officials simply cannot manage a city, represent its citizens, provide any mix of services, protect homeowner value or plan for the future … without dealing with these gaping holes in the balance sheet.

There are bright spots: The community of Portage has essentially no unfunded debt, while neighboring Kalamazoo has no underfunded pension liabilities, though the city does have $263 million in unfunded retiree health care obligations. Action taken early can resolve these tough problems. But local officials cannot avoid making the tough choices now. If they don't, their communities and their quality of life, may well not survive.

Bridge's ground-breaking coverage of the crisis continues in a two-part installment on Tuesday and Thursday of this week. I urge every concerned citizen to read it (at Bridgemi.com) and ponder.———Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and economics. He is also the founder and chairman of the Center for Michigan, a nonprofit, bipartisan centrist think–and–do tank, designed to cure Michigan's dysfunctional political culture; the Center also publishes Bridge Magazine. The opinions expressed here are Power's own and do not represent the official views of the Center. He welcomes your comments at ppower@thecenterformichigan.net